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• About 460,000 companies closed in the first quarter.
• March passenger car sales fell 40.8 percent from a year earlier to 1.08 million units.
• Travel bookings for the three-day weekend at the beginning of April were up 50 percent over the previous weekend.

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Quote of the Week

The uncertainties and challenges of China’s foreign trade have increased significantly. A great many companies face cancellations of existing orders or delays, and most of their active orders are short-term, with few long-term ones.

Ren Hongbin, assistant minister of commerce.     
From South China Morning Post

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Numbers Games 

Accounting scandals at two major companies and short-seller allegations aimed at another firm have again raised questions about the integrity of Chinese corporate reporting. The new book-cooking could discourage overseas investors from participating in future IPOs, Bloomberg News notes.  

On Tuesday, Wolfpack Research accused iQiyi, the Chinese video streaming site, of overstating its revenues by $1 billion, according to CNBC, starting before its IPO in 2018 and continuing ever since. Often called “the Netflix of China,” the Nasdaq-listed company controlled by Baidu said the report contains “numerous errors, unsubstantiated statements and misleading conclusions and interpretations.” Wolfpack describes itself as an “activist research and due diligence firm.” (CNBC)

On the same day, TAL Education Group a tutoring business listed on the New York Stock Exchange, announced that an employee had inflated sales by forging contracts. The company’s rise made co-founder, Zhang Bangxin, one of China’s richest people. (Bloomberg)

The news came a week after the Nasdaq-listed Luckin Coffee Inc., a rival to Starbucks in China, said that Jian Liu, its chief operating officer, and others may have fabricated billions of yuan in sales for 2019. (Bloomberg)

Like a Battlefield After the Battle…

Surveying the economic wreckage left by the coronavirus, it is easy to envision a painful aftermath for China. 

The early indicators have a jagged feel. The world’s second-largest economy could fall into its first quarterly contraction in at least 30 years. The job market is the worst in at least 20 years. Many Chinese consumers are drowning in debt. 

But signs of life are showing up. Commodities are gaining. Foreign car makers are increasingly optimistic about sales in China. Venture capital deals rebounded after a horrendous January and February. Stimulus — fiscal and monetary – could be on the way. Overseas firms are looking to China for help. 

Still, prospects for recovery are hitting headwinds with trade threatened in what appears to be a developing global recession.

Fiscal Over Monetary Policy

Don’t expect China’s central bank to echo the U.S. Federal Reserve’s sharp rate cuts or big quantitative easing moves. Challenged by the impact of the coronavirus pandemic, The People’s Bank of China will boost credit and cut interest rates, especially for small firms seen as vital for growth, sources told Reuters. The bank will ease its lending policy cautiously because of debt concerns and property risks, and support fiscal stimulus, which will play the main role in supporting the economy, the sources said. Chinese leaders have acknowledged the limits of monetary policy in the past. (Reuters)

Global Trade Fears 

They may be managing expectations, but Chinese government officials are speaking openly of a severe demand hit from the coronavirus slowdown in global trade and weakness in key export markets, reported South China Morning Post. 

They are not alone in their pessimism. The World Trade Organization this week predicted a trade slowdown over the next year of up to 32 percent, in its “worst case scenario” model.

This week, the National Bureau of Statistics will release trade data from March. In January and February, exports fell by 17 percent from 2019 levels. A survey of economists by Bloomberg forecasted a slight improvement — a 13.9 percent drop. (SCMP)

The Embattled Consumer

The coronavirus pandemic has taken its toll on borrowers. As they struggle with reduced income, more consumers have fallen behind on credit-card and loan payments, according to some Chinese banks and online lending platforms. This could lead to a stream of defaults in the coming months, The Wall Street Journal reported.

Mortgage debt and short-term consumer loans have grown rapidly in the past decade. Household debt levels reached a high of 55.95 trillion yuan ($7.9 trillion) in January, according to data from China’s central bank. Despite government calls to keep credit flowing, some lenders have reduced loan originations. 

Tian Huiyu, president of one of the country’s biggest issuers of credit cards, China Merchants Bank, said last month that delinquencies on credit-card debt, mortgages and micro loans rose significantly in February with much of the country’s population under quarantine. (WSJ)

Brother Can You Spare a Job?

China’s job market has taken a beating. It’s in its worst shape in at least 20 years. More bad news for labor may be ahead. 

Seventy to eighty million people in services, manufacturing and construction either were not working or had lost jobs at the end of March, according to economists at UBS Group AG. 

They expect unemployment to decline rapidly this year, Bloomberg reported. They fear that more than 10 million jobs will be at risk as manufacturers and exporters suffer this month from the downturn in the global economy. (Bloomberg)

Bailing Out a Smaller Bank

These have been tough times for many of China’s smaller banks — hit by the economy’s slowdown in the past two years and the government crackdown on financial risk-taking. 

The government has moved to support several banks. The latest is the ailing Bank of Jinzhou. The central bank will buy $21 billion of assets from Jinzhou, for less than a third of their reported value. Business closures in the wake of the coronavirus pandemic are expected to put pressure this year on even the largest Chinese banks. Authorities seized one last year for the first time in decades,  It called the troubled lender, Baoshang Bank, a “serious credit risk.” (WSJ)

Keeping Foreign Capital Happy

Facing a possible prolonged global slowdown, Beijing is moving to break up supply-chain bottlenecks to keep foreign companies from leaving China or cutting back on production, according to The Wall Street Journal.  

Recently, the government gave special clearances to Ford Motor Company to obtain car lamps from its supplier Valeo SA’s factory in the locked-down central Hubei Province, according to a person familiar with the matter.

At least five other foreign auto makers, including Volkswagen AG and Hyundai Motor Company, received special logistics clearances to quickly procure parts from Hubei, a senior government official said.

Foreign direct investment in February fell 25.6 percent compared with a year earlier as the coronavirus pandemic froze investments. (WSJ)

An Edge for VCs

Venture capital investment may be picking up, as VC firms find bargains amid the start-up companies whose valuations have fallen in sync with listed equities in the stock markets. 

As the coronavirus pandemic unfolded, venture capitalists struggled to raise funding and make deals as investors worried that a looming recession would wreck start-ups. But 66 deals were made in China during the week ending March 28,  just below figures from the same time last year, according to Pitchbook, the private markets watcher.  

“Starting in March, deal activity has come back,” said Tony Zhang, a partner at the China tech-focused investor Jeneration. 

But there’s a tougher approach to investing now. VCs are less tolerant of perpetual losses and want to see a clear path to profitability earlier. (SCMP)

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